Lebanon: Economic Highlights

SAFADI FOUNDATION USAEconomic Highlights from LebanonSeptember 2012

Introduction

In an effort to promote information on governance priorities in Lebanon, the Safadi Foundation USA has compiled the following summary on current economic challenges and reforms in Lebanon based on official sources provided by the Ministry of Finance (MoF) and meetings with leading economists and bankers in the country. This document attempts to highlight some of the major activities taking place right now, and in no way does it seek to detail Lebanon’s economic and financial intricacies. In addition, background materials on Lebanon and the economic situation are attached for those that would like to take a more in depth look.

Summary

Lebanon is mainly a service-based economy with the real estate, trade and tourism sectors as its main drivers. In addition, the financial sector comprising banking and insurance is an integral part of Lebanon’s economic resilience and stability. Lebanon’s banking system is large in comparison to the size of its economy (deposits to GDP ratio hovers around 300%). It constitutes the backbone of the economy and was shielded from the global financial crisis due to its conservative policies. Hence, it was able to continue increasing credit to the private sector despite a declining trend in this area internationally and despite regional instability. Overall, banking loans to the private sector have increased by 12% in the first half of 2012 and subsidized loans from the MoF have also increased by more than 30% in 2011.

Although progress is being made with a growth rate of 3%, Lebanon’s economy continues to face significant pressure. The global financial crisis as well as revolutions, transitions and continuing protests in the Arab region have been additional sources of stress on Lebanon’s economic potential. Furthermore, domestic tensions as a result of the crisis in Syria are also a major strain on Lebanon’s economic stability. Despite having withstood these pressures thus far with a positive growth rate, Lebanon continues to find itself in fragile and uncertain territory that makes maintaining macroeconomic stability challenging for any country in this environment. In light of these challenges, a core-team of dedicated public servants continue to work on implementing domestic policies that seek to enhance the delivery of public services to Lebanese citizens and create an environment that is conducive to growth.

Current Economic Highlights

Some initiatives underway in Lebanon’s public sector that aim to reduce fiscal vulnerabilities, improve transparency and accountability, and promote economic growth and financial stability are:

Reducing Fiscal Vulnerabilities

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The MoF is making every effort to maintain financial stability and maintain government debt on a declining trend. The debt to GDP ratio has declined from its peak of around 180% of GDP in 2006 to reach around 135% by the end of 2011. This has been accompanied by a change of debt composition from an equal split of 50% between foreign and domestic debt to a composition more skewed towards domestic debt by the end of 2011 (61% domestic debt).

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The fiscal deficit has declined to 6% of GDP by the end of 2011 compared to 11.7% five years earlier. At the same time, the primary surplus to GDP ratio also reached an all time high of 3.4% in 2011, improving from 0.9% in 2007.

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The activation of the Public Debt Directorate within the MoF with the assistance of EFMIS (Emergency Fiscal Management Reform Implementation Program with the European Union) will build the capacity of the Ministry to manage the public debt and positively contribute to the macro policy framework. The office has set out a five-year strategy to analyze and manage the public debt and reduce risks. A sound debt policy will reduce Lebanon’s economic vulnerabilities from internal and external shocks. In addition, by establishing the right infrastructure within the ministry an exit strategy for UNDP is underway and will improve overall sustainability.

Improving Transparency and Accountability

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Lebanon has not had a reliable accounting system since the end of the civil war in 1990, and has lacked audited accounts with accurate figures. The MoF is in the process of producing and auditing all government financial accounts from 1993 to this date.

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One of Lebanon’s primary challenges is the delivery of services to citizens. The continued restructuring of the tax administration by the MoF towards a function-based structure will modernize the tax system and promote reliable services to citizens. This effort has been underway in previous governments and is being pursued and further developed under the current one.

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Lebanon’s national priorities need to be better reflected in the national budget process. The Macro Fiscal Unit within the MoF is undertaking important reforms that will link the vision of the government with what is presented in the budget through the adoption of the IMF Government Finance Statistics (GFS) 2001 classification system. This is an internationally recognized budget classification system that was adopted by the current MoF. This shift will enable the organization of data to better meet reporting requirements and provide a more detailed analytic understanding behind the numbers helping to bridge the gap between the budget and national priorities.

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Each Ministry within the Government of Lebanon is responsible for producing and submitting a budget. Given the lack of cohesive guidelines for ministries to follow, it has not always been a transparent and/or efficient process. Efficiency in the budget-making process is now being boosted on an operational level with the introduction of a manual to assist ministries in the budget preparation process. Additionally, all budgets are now expected to be posted online in the third quarter of 2012.

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Corruption and inefficiencies in government institutions are a common complaint by citizens. One way the MoF is seeking to address this deeply rooted problem and improve the transparency and accountability in citizen-government relations is through E-Government. The MoF launched in August 2012 its first on-line e-government service which allows citizens to log onto its website and check their outstanding payments that are due in relation to built-property tax. This initiative is a first step towards a more robust comprehensive reform plan based on the provision of online service to citizens. As of September 1, 2012, taxpayers were also granted the right to register with the MoF and secure their online user names and passwords allowing them to check other items of outstanding taxation due, which include VAT, income tax and built-property tax. In a follow-up step, which is expected to be launched by first quarter of 2013, citizens may pay taxes or other forms of fees through e-payment gateways through their banks or through online payments using credit cards. Beginning in 2013, citizens will also be able to submit their VAT declarations on-line. The same initiative may be translated to other Government bodies including Customs and other line Ministries that provide direct services to citizens.

Promoting Economic Growth and Financial Stability

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Lebanon’s entrepreneurial spirit is strong. In fact, three of the five selected Arab Innovators selected by MIT’s Technology Review “TR 35” came from Lebanon. However, despite this strong determination and creativity by young Lebanese there is little financial support by way of equity funding. The MoF is addressing this challenge and is in the final phases of negotiating a $30,000,000 loan from the World Bank, which is in the final negotiation phase. The loan aims to establish and finance a funding facility (Innovation in SMEs – iSMEs fund) to stimulate innovation by entrepreneurs and increase the availability of equity investments for young, growing firms. This type of public involvement in equity funds and grants for businesses is a tested model used by many governments as a means of supporting a funding gap in the market. In addition, this will generate a more robust risk-taking culture, stimulate entrepreneurship, and, over time, enhance the potential for additional private sector jobs.

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Despite the unstable regional environment, the MoF has succeeded, since August 2011, in completing in the market new issues and exchanges of Eurobonds amounting to more than $5 billion. The issues have all been many times oversubscribed, including by international investors. The maturities of the new Eurobonds ranged between 5 and 15 years, with coupon rates varying between 5.0% and 6.6%, which are significantly lower than borrowing rates by many European countries.

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In August of 2011 the GoL established a legal and regulatory framework through the legislation of Law No. 161 on Financial Markets. The creation of an autonomous Capital Market Authority will boost economic growth and contribute to financial stability by organizing financial markets in a more transparent manner that will ultimately reduce risks and promote domestic and foreign investments.

Recommendations

Safadi Foundation USA strongly supports FY2013 State and Foreign Operations Appropriations report language that “urges the Department of State to focus assistance for Lebanon on efforts that promote transparency, strengthen financial management, and improve efficiency of government institutions.” In addition, Safadi Foundation USA recommends the following guidelines for helping to improve Lebanon’s fiscal environment. These measures will help restore and strengthen citizens’ confidence in state institutions and will enable the Government of Lebanon (GoL) to be more efficient in the delivery of public services.

Donors are encouraged to support the GoL to:

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Legislate the passage of a budget that reflects the national priorities of the country and for a full implementation of the budget law;

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Urge the State to recover all illegal occupied public properties;

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Enforce the protection of individual property and rule of law by forcing illegal occupants of private properties to dismantle their built properties, thus protecting individual property and imposing the rule of Law;

Embrace the concept of Public Private Partnerships (PPPs) and legislate a PPP law. PPPs are a great way for the public sector in Lebanon to improve infrastructure that is estimated to cost around $20 billion. By paving the way for the private sector to participate, Lebanon can avoid huge economic burdens and ensure that the best quality and competitive services will be delivered to the people since it will be the private sector that carries the cost of the risks.

Donors should continue to support a stable Lebanon by:

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Supporting Lebanon’s ability to maintain internal security and working to ensure a peaceful regional environment. All of Lebanon’s industries depend on this stability to thrive. Instability caused by recent regional turmoil has led to a significant drop in Lebanon’s tourism sector;

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Directing assistance in the area of democracy and governance to both civil society and government institutions; and

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Assisting the GoL to make sure proper mechanisms are in place for the proper handling and oversight of any revenues from natural gas reserves off the coast of Lebanon. Lebanon’s energy sector, specifically electricity is rife with corruption and is one of the largest sources of frustration by citizens. Every precaution should be taken not to duplicate these same inefficiencies.